Monday, January 25, 2010

Hovenkamp on Post-Sale Restraints and Competitive Harm

Herbert J. Hovenkamp, University of Iowa College of Law, has (another) new paper, Post-Sale Restraints and Competitive Harm, which sets this contemporary issue in its historical context. Here's the abstract:

A post-sale restraint is a condition or contract provision that operates after a good has been sold. In antitrust law these restraints are roughly divided into two classifications, “intrabrand” and “interbrand.” An intrabrand restraint limits the way a firm can distribute the restricted property. For example, resale price maintenance controls the price at which goods can be resold. Intrabrand nonprice restraints place other types of limits, such as the places from which goods can be sold, the uses for which they can be sold, and the identity of buyers. By contrast, an interbrand restraint limits a purchaser’s right to deal in the goods of rivals. “Exclusive dealing” involves a buyer’s promise not to purchase competing goods from anyone else, and “tying” refers to a buyer’s promise to take a second product from this seller as well.

Intellectual property policy also has rules that limit post-sale restraints. Many of these are addressed under the rubric of intellectual property “misuse,” whose substance is similar but not identical to antitrust rules. A third rule, the IP “exhaustion” or “first sale” requirement, applies to these same restraints as well. Unlike both antitrust doctrine and misuse doctrine, the first sale rule refuses to enforce post-sale restraints without querying into anticompetitive effects, economic benefits or impact on innovation. Whatever policy justifications it may have were not made apparent in the Supreme Court’s 2008 Quanta decision, its first application of patent law’s first sale doctrine in sixty years.

Quanta ended a trend in both the Supreme Court and Federal Circuit of using the law of post-sale restraints to prohibit unreasonable limitations on competition or innovation, while permitting the market to govern their use otherwise. Instead the Court reverted to a per se rule that refuses to enforce post-sale restraints without regard to economic consequences. While rationales exist for the first sale doctrine, these pertain to whether breach of contract suits or infringement actions are better devices for downstream enforcement of IP restraints and the extent of notice communicated to downstream infringers. But these considerations were also irrelevant to the per se rule that the Supreme Court adopted.

This paper critiques this per se approach to first sale doctrine, concluding that it lacks a defensible policy justification and that it is inconsistent with a decades long trend toward increasing sophistication in the analysis of vertical restraints involving intellectual property rights.